Who Came Up With Sound Money?

Have you ever wondered why your grocery bill has been so high over the last few years? The answer is inflation, a product of the current economic system. The Federal Reserve currently targets an average inflation rate of around 2% over time.

In practical terms, this means that the dollar inevitably loses some of its purchasing power. The question is, why? Has it always been that way?

For many generations, the main type of money that Americans have used is paper bills. Since the end of the Bretton Woods system, this money has derived all of its value from fiat: that is, by the declaration of the government and shared societal trust in its value.

However, there was a time when the US did not use a fiat currency. For much of US history, sound money like gold and silver coins served as the foundation of the monetary system, though paper notes circulated alongside them.

Sound money has a long and storied history, one characterized by famous philosophers, revolutionary governments, and several cultural settings. In particular, there are four philosophers who really helped establish the principles of sound money as Americans understand them.

To start off our story, we'll begin with one of the most famous philosophers in history: the ancient Athenian philosopher Aristotle.

Aristotle's Philosophy of Sound Money

Aristotle was one of the most influential philosophers in history. He was perhaps the most famous student of the philosopher Plato, often regarded as the father of Western philosophy.

His Lyceum was a famous school that trained Athens' most promising young men in logic and knowledge; Aristotle's reputation was so great that he became the tutor to Alexander the Great.

Aristotle was heavily influenced by Plato, but differed from him in significant ways. At the risk of being overly simplistic, Plato was often very interested in abstractions and ideals. In contrast, Aristotle was very focused on this world and empirical reasoning.

Those interested can see this difference between them in two major works: Plato's Republic and Aristotle's Politics. Plato's Republic imagines an ideal government and polity based on how things should be.

Aristotle's Politics was different. His work focused on analyzing the different systems of government worked and which failed.

Why does this matter for the history of sound money? It matters because Aristotle was one of the first philosophers to really give serious thought to what people should use in trade, and he did that in the Politics.

Aristotle first gave an account of how money came into existence. At one time, most societies operated on a system of barter and trade. Over time, societies developed money as a more convenient medium of exchange.

Now, according to Aristotle, even though money simply evolved as a matter of convenience, it was for the best that money retain its value.

Later economists summarized Aristotle’s thinking into several practical characteristics of good money:

- Durability: it must not perish, fade, or corrode over time

- Portability: it must hold high value relative to weight/size

- Divisibility: it can be split into smaller units without losing value

- Recognizability/fungibility: it must be easily identified and interchangeable

What does all of this mean practically? For starters, it means that money should have widely recognized value to the community using it. Commodity money like gold and silver often work best to meet this criteria.

This system prevents governments from inflating away currency value. Finally, it should be a "natural" asset; that is, it should be an item that naturally emerges in the market, rather than something the government declares.

Medieval Monetary Thought

The next major philosopher in our story is a 14th century French philosopher named Nicole Oresme. Unlike Aristotle, whose monetary theory was a part of a broader philosophical topic, Oresme wrote the first text dedicated solely to money.

His work on the subject had a long Latin title that translated to, "Treatise on the Origin, Nature, Law, and the Alteration of Monies". Oresme's point was less about what should be used as money, and more about monetary policy.

Oresme held that coins held by the people are not the property of the king or government. Rather, they were the property of the people.

Given this principle, when the government debases currency, it constitutes a type of fraud. Fraud, in Oresme's Christian context, was considered both sinful and unjust.

Hence, if the sovereign runs the mint, he is duty-bound not to debase currency. If he debases currency or alters it significantly, he has committed fraud against the people he rules.

Oresme did distinguish between types of coin alterations. For example, it was okay for a newcomer prince to replace the effigy of the previous ruler with his own. However, if he did anything to change the value of a coin, that was considered fraudulent.

Though this particular point does not tie in directly with Aristotle's ideas about monetary requirements, it does support one of Aristotle's key points: namely, that currency has an intrinsic value.

The king does not have the right to change a coin's value and upend the financial security of his subjects.

At the time, this was a radical concept. It was yet another move in the later medieval period that placed checks on the monarchy and emphasized the state's duty to its people.

Though it may not seem like monetary theory would play much into religious thought, this underlying principle would come to matter a great deal in the Protestant Reformation.

As Protestant kingdoms broke away from the authority of the Pope, it prompted a renewed discussion about authority in the church. Who was the head of the new Protestant churches?

According to many bodies, such as the Church of England or the Scandinavian Lutheran Churches, the head of the church in a given kingdom was the king. This decision required a reformulation of the relationship between spiritual and legal authority.

The debates that followed provided the context for many of the Enlightenment philosophers who shaped the modern world. Of that group, few are quite as famous or influential as John Locke.

John Locke, Sound Money, and the Social Contract

John Locke is perhaps most famous for a few philosophical principles. First, he argued that there were three natural rights of man, those being the right to life, liberty, and property.

Second, he is famous for developing the idea of the social contract, a theoretical agreement by which governors rule by the consent of the governed.

Locke's beliefs about money derive from these two core principles. For Locke, money arose from the social contract as an item rooted in convention and agreement. It was also a practical instrument enabling division of labor.

Given the longstanding convention and agreement that led to sound money being used as currency, Locke agreed that sound money was the best form of money. However, he did differ somewhat from Aristotle and Oresme.

The chief difference was that, for Locke, money did not necessarily have to be something with intrinsic value. Likewise, he did not believe that what constituted money could not change.

However, he did not believe that this change could come from the government. Instead, Locke believed that the governed could change what served as money through common consent.

Joshua D. Glawson cites Locke as follows:

"Mankind, having consented to put an imaginary Value upon Gold and Silver, by reason of their Durableness, Scarcity, and not being very liable to be Counterfeited... have made them by general consent the common Pledges, whereby Men are assured... to receive equally valuable things..."

Glawson points out that Locke's theory of money was overly "contractual", and largely theoretical. Since it was based on consent and not on any concrete realities, Glawson and other scholars argue that this theory laid the intellectual groundwork for later fiat monetary systems.

From Philosophical Theory to Political Practice

During the Revolutionary War, the Continental Congress printed paper money out of necessity. However, that money quickly became overinflated. By the time the war was over, the country was largely relying on foreign money, particularly from Spain.

When the thirteen colonies were at war with the British, they were governed by the Articles of Confederation. The Articles allowed states to print their own money, as well as the Continental Congress.

As you might guess, that system quickly became confusing at best and disastrous at worst. The ratification of the Constitution in 1789 gave Congress complete control over the minting of money.

One of the key figures in determining how that worked was Alexander Hamilton, the Secretary of the Treasury. Hamilton established a bimetallic monetary system in the U.S. through the Coinage Act of 1792.

The bimetallic system recognized both gold and silver as monetary metals. Hamilton proposed a 15:1 ratio of silver to gold. This means that fifteen silver coins were equal to one gold coin.

Furthermore, Hamilton was instrumental in establishing the US Mint in Philadelphia to produce these coins. He also supported a decimal-based currency system, where the silver dollar served as the primary unit of currency.

Though our currency has changed in the centuries since, the decimal system remains. We continue to use this system, and we were the first nation in the world to adopt it.

The goal in all of these procedures was to create fiscal stability, which would then allow the country to have a stable and successful economy. For a while, the system remained.

However, over time, gold's value grew to far exceed that of silver. As a result, the nation moved to a de facto gold standard. The gold standard remained in place until the 20th century.

The State of Sound Money Today

Today, the US monetary system operates entirely on fiat currency, rather than gold or silver coinage. Even our coins no longer possess real silver, a change made by the federal government in 1965 to prevent silver hoarding.

What started this massive change? The origins of it came from President Franklin Roosevelt. During the Great Depression, many Americans hoarded gold out of a profound lack of trust in the US paper currency.

In 1933, President Franklin Roosevelt issued Executive Order 6102, which required most Americans to surrender their gold to the government. Domestic convertibility of dollars into gold ended, though the dollar remained tied to gold internationally.

In 1971, though, that lingering gold standard died with the end of the Bretton Woods system. Since that time, America has officially operated under a fiat currency.

Today, sound money is primarily used as an investment asset. Investors use it as a preservation asset to protect their savings and wealth over time.

And yet, though sound money has taken a beating in recent decades, there are signs that things are changing. As the dollar weakens, many central banks have purchased gold to decrease their reliance on the dollar. Interestingly, 2026 has seen some central banks purchase silver as well.

Several states have also passed legislation to eliminate capital gains and sales taxes on gold and silver. Some have even gone so far as to establish gold and silver as legal tender.

It is unclear whether the United States will ever return to a system of sound money currency being standardized. However, given its lengthy history, philosophical underpinnings, and current investment value, sound money is not likely to go away.